Hello again-- this is Ben Thomas and I just attended the Nassim Nicholas Taleb Session 'The Black Swan.' I was looking forward to this one because I work in risk management and deal with uncertainty on day to day basis.
Taleb describes a 'black swan' as an improbable event that carries massive consequences (or perhaps extreme positive impact) but is difficult to predict with accuracy. He noted examples such as 9/11, market crashes, and the exponential growth of the Internet. The Black Swan metaphor is used because years ago people had no reason to believe swans were anything but white. It's common sense, right? Thinking changed as humanity learned that black swans are common in specific regions of Australia.
Taleb presented the idea that we tend to look at history in a rear view mirror and this gives us the illusion that we understand it. This increases our confidence in our ability to understand the future. We are unable to fully understand history because of overcausation. Taleb used an example of a 'self-described' expert economist who commented on market events.
"What we're seeing in the market today is a once in 10,000 years event." --then it happens two days in a row. Does this make it a once in 100,000,000 year event? Should these assertions even be made?
Two domains are used to describe improbable events:
Mediocristan - an extreme event, but with immaterial impact
Extremistan - an extreme event that changes everything
We live in Extremistan. With the rise of global communication, ideas and events do not remain isolated. The Internet brings concentration. There are roughly 30,000 novels publish each year, but only a few receive recognition.
Wallstreet is also Extremistan. Returns can can be nominally positive year after year, but a single event can cause everything to crash.
Taleb advised us to 'not be a turkey.' He used this to illustrate the point that everything can seemingly be going well, but end instantaneously.
1. Turkeys are fed day after day by the butcher
2. This continues for 1000 days
3. Two days before Thanksgiving the food stops
4. Say goodbye to the Turkey
The problem is that the turkey thought the butcher was acting in its best interest. The butcher was only acting in his own interest. Don't be blinded by "sophisticated analysis," randomness can not be ignored.
Taleb left several other words of wisdom.
1. Avoid the illusion of control; don't ask a barber if you need a haircut
2. Seek negative advice; seek advice on what to avoid rather than what do to
Taleb said that this is a conservative approach, but also acknowledged that that the inverse of risk is opportunity. Entrepreneurs have positive exposure to black swans. The beauty of innovation is often found in unintended uses. Taleb joked that the Internet was originally developed for the military to gain an over Russia, but did not have major impact until it was unintentionally used to help lonely men find Russian brides.
Be skeptical of forecasts. Expect randomness. Find opportunity.